Blog

Redefine ‘segmentation’ in the digital banking age

By : Arindam Karmakar

General Manager - BFSI

Financial Institutions have made people realise that finances are hardly a hiccup when it comes to fulfilling aspirations and achieving life goals. A 25-year-old professional can now own a house which he could have only imagined to buy with 20 years of savings. Aspiring entrepreneurs can now deliver big with a little of his own capital. With affordable interest rates and high liquidity, banks are here to meet financial aspirations of individuals and corporates.

The issue now for the Financial Institutions (FIs), especially in the ones targeting retail and MSME sector, is to discover new segments that can potentially provide higher returns and do so in compliance with the core values of the institution.

The massive stockpiles of customer data like the demographic details, income and spend patterns are already being leveraged. We already know a number of banking activities that are done over mobile with a substantial number of millennials using the mobile channel as depicted below.

source: Payments Cards & Mobile

However, there is another set of data comprising their mobile phone banking usage, preferences to their circle of friends and influence based on social media – in other words, their digital persona which largely remains untapped.

Dynamic customer base with dynamic needs

Non-banking financial companies (NBFCs) play an important role in the mass retail semi-urban and rural sectors. Traditionally these sectors have been of less interest to the banks. Until a year back, NBFCs were content in having business in specialised segments like Vehicle Finance, Gold Loan, etc. However, now the market dynamics has changed.

The new age Small Finance Banks, equipped with the experience of being microfinance institutions know the semi urban and rural markets extremely well. Although NBFCs have shown growth on a year on year basis, such growth rate has not reflected the potential growth rate of the overall segment. Considering these factors, NBFCs will now have to look to diversify their portfolio, preferably offer products that can be sold to the existing customer base.

We are already seeing this transformation in progress. NBFCs specialised in Gold Loan, are now looking to tap the Vehicle and Home Loan segments, similarly, NBFCs specialising in Vehicle loans are now targeting to grow in Home Loan segment. This is an important transformation that the NBFCs in India are going through and in the long run this diversification will help in increasing Year on Year disbursements, assets under management (AUM), Income, Return on Assets and above all decrease concentration risk.

Traditional CRM is static

Traditionally Financial Institutions have used demographic information stored in the CRM tools to use segment the customers. Experts say that, in an ideal scenario, with a GDP growth rate of 7-8 % on a year on year basis, the standard of living of people doubles in every 12-14 years.

However, how many times does the CRM get updated with this data and what is the cost of this updating. Are there other ways to understand the ever changing preference of customers and meet the growing aspirations of the masses?

Segmentation basis from KYC to BYOP

Financial Institutions now realise that relying solely on the regular KYC data such as income, age and geography is not enough. In the last decade, financial Institutions have invested high on digital channels which have been readily lapped up by the customers as shown below.

source: The Financial Brand

Digital footprints can be obtained from every customer interaction that happens with any of the digital channels. Analysing these footprints using the new age analytics, artificial intelligence (AI) and machine learning techniques, reveals behaviour and consumption patterns of the customers.

These insights can be used to build a digital persona of the customers – both on the behaviour (online shopping, international travel, mobile wallet usage) and consumption (dining, entertainment, personal vehicles, public transport usage) patterns. This continuous profiling can then be used to predict the spending pattern of a customer and from the spending pattern understand the current needs and predict the future financial needs of the customer.

This will give rise to a winning banking model of contextual banking. It allows banks to offer a seamless experiencing by pushing financial offers to the customers at the place and time of need which may coincide with major lifestyle events like children going in for higher education, job change or relocation. Apart from regular promotions, contextual offers can also be used for cross selling or up selling thereby strengthening consumer relationships. In such cases, specific instances like a customer’s account balance not being able to cover a purchase or the customer exceeding the bank credit limit could act as triggers to enable actions like extending a customer’s credit limit or offer an overdraft.

In the digital age, customers expect banks to understand their preferred communication channels, willingness to share personal data in various scenarios and ability to engage. A new model – referred to as “bring your own persona” (BYOP), built on the foundations of increasing digital footprint and advanced analytics and AI will emerge as a basis for segmentation in the new digital realm.

Follow the telecom and retail innovation

Players in the telecom and retail sector have innovated substantially in the digital marketing space. They have already started leveraging the new age machine learning techniques to identify nano segments and extend tailor made offers and services at the right time, right place and through right channel. Financial Institutions have an opportunity to learn from the techniques applied in the telecom and retail industries. Given the change in competitive landscape and customer profiles, financial institutions do not have many options but to adopt, adapt and grow.

The key drivers of change in the way financial institutions nurture their customer relationships include the adoption of enabling technology and the insight available from the customer’s digital persona. Organisations that embrace these drivers, use them to better understand their customers’ habits and preferences and combine it with the user experience will have a true strategic advantage.